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Chapter 10: Q21E (page 539)

(Analysis of Subsequent Expenditures) King Donovan 91影视 Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company鈥檚 plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Short Answer

Expert verified
  1. Plant assets should be capitalized
  2. Painting costs are considered ordinary repairs
  3. Replacing the old plant roof is supposed to increase the service life of the property.
  4. Conceptually, the book value of the old electricity system needs to be removed.
  5. With an increase in useful life, a debit to accumulated depreciation occurs.

Step by step solution

01

Meaning of Subsequent Expenditure

Subsequent expenses are those incurred after an asset is recorded in the financial statement and delivered to the destination and state planned. Repairs, upkeep, overhauls, upgrades, and replacements could all cost money.

02

(a) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant

270,000

Cash

270,000

(To record the addition made)

Plant assets are capitalized when they are added since a new asset has been created. As a result, this enhancement makes the plant more valuable.

03

(b) Indicating the transaction and detailing its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Improvement expense

23,000

Cash

23,000

(To record the improvement made)

Expenditures that do not improve the asset's service benefits are expensed. Painting expenditures are considered standard repairs since they keep the asset in good working order or return it to its previous state.

04

(c) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant -roof

61,000

Loss on disposal

41,000

Plant-roof (old)

41,000

Cash

61,000

(To record the replacement made)

Investing in the new roof will increase the service potential of the asset.

05

(d) Indicating the transaction and detailing its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Repair expense

22,000

Cash

22,000

(To record the repair expense)

The book value of the preceding electrical system needs to be conceptually removed. However, in practice, it is generally difficult, if not impossible, to determine this quantity. In this situation, one of two techniques is used.

The second method is to reduce accumulated depreciation, assuming the replacement will prolong the asset's useful life and recover part or all of the previous depreciation. The difficulty with our current position is that the useful life has not increased, so it is unfair to debit accumulated depreciation. Consequently, must include this expense in the cost of the plant facility.

06

(e) Indicating the transaction and explaining its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Accumulated depreciation

47,000

Cash

47,000

(To record the addition made)

A detailed clarification is given in the transaction (d) answer. Since the asset's useful life has risen, a debit to Accumulated Depreciation appears to be the best option in this instance.

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Most popular questions from this chapter

Question: Provide examples of assets that do not qualify for interest capitalization

(Analysis of Subsequent Expenditures) The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.

Jan. 30 A building that cost \(132,000 in 2000 is torn down to make room for a

New building. The wrecking contractor was paid \)5,100 and was

permitted to keep all materials salvaged.

Mar. 10 Machinery that was purchased in 2010 for \(16,000 is sold for \)2,900

cash, f.o.b. purchaser鈥檚 plant. Freight of \(300 is paid on the sale of this

machinery.

Mar. 20 A gear breaks on a machine that cost \)9,000 in 2009. The gear is

replaced at a cost of \(2,000. The replacement does not extend the

useful life of the machine but does make the machine more efficient.

May 18 A special base installed for a machine in 2011 when the machine was

purchased has to be replaced at a cost of \)5,500 because of defective

workmanship on the original base. The cost of the machinery was

\(14,200 in 2011. The cost of the base was \)3,500, and this amount was

charged to the Machinery account in 2011.

June 23 One of the buildings is repainted at a cost of $6,900. It had not been

painted since it was constructed in 2013.

Instructions

Prepare general journal entries for the transactions. (Round to the nearest dollar.)

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.
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